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The Secret Behind Better Oil Major Earnings

After several years of austerity and belt-tightening, the major international oil companies posted substantial profits in Q2 of 2017. The five largest private oil companies together generated more than $30 billion in profit, an indication that most have successfully adapted to the current bout of low prices, while a few have publicly indicated their belief that prices will hover around $50 for the foreseeable future.

What this means is that the “mega projects” that dominated many companies’ balance sheets for the last decade will become increasingly rare, as the majors pivot towards short-term, low-risk ventures with a faster turnaround. A closer look at each company shows how individual firms have adapted in distinct ways to this new era.

Chevron Corp, the second-largest U.S. major after ExxonMobil, invested heavily in large upstream projects when the price of oil shot past $100 again after the 2008-2009 global recession. The massive Gorgon natural gas facility and Wheatstone complex in Western Australia, with a combined price tag of more than $50 billion and a cost overrun of nearly $20 billion, represented a huge, costly investment for Chevron and one that struggled to reach optimal output.

For most of 2016, the news out of Gorgonwasn’t good and Chevron’s flagship project looked increasingly like a boondoggle. The company’s upstream activity fell off, declining from 2.67 million boe/d to 2.59 boe/d from 2011 to 2016, while earnings from upstream fell with prices: from $20.8 billion in 2013 to $1.96 billion in 2015, according to SEC filings.

All that’s changed, however, as earnings from upstream rose in 2016 and are now on-track for a solid recovery. The company posted a loss of $102 million in its U.S. upstream operations, but that’s down from $1.11 billion a year ago, and profits from international upstream were $955 million, compared to a loss of $1.35 billion in 2016. Investment in the U.S. patch has ramped up as Chevron looks to capitalize on the shale boom: the company’s portfolio in the Permian Basin is worth at least $43 billion.

In Q2 of 2017 Chevron’s output reached 2.78 million boe/d, with a positive outlook for Q3. The bulk of new output came from the company’s major projects. Production was up an impressive 252,000 boe/d from 2016, as Gorgon’s growing pains receded.

Chevron posted Q2 profits of $1.5 billion, compared with a loss of $1.5 billion in Q2 of 2016. The company’s earnings exceeded expectations and share price rose 1 percent at the news.

ExxonMobil also reported healthy profits of $3.4 billion in Q2, though the report wasn’t enough to impress the market. Share prices fell 2 percent as the company reported relatively stagnant upstream activity: upstream volumes fell 1 percent to 3.9 million boe/d. Earnings were high primarily thanks to slashed capital expenditure and exploration, which is down 24 percent from a year ago, and the rising price of oil and natural gas compared to 2016, which helped the company realize upstream profits of $1.18 billion, up from just $294 million a year ago.

While the world’s largest traded company appears strong and is still a veritable cash machine for investors, its performance disappoints when compared to its peers. There’s also the news out of the U.S. patch, where Exxon has been pumping more money and paying more attention. Despite the low cost of operating in the Permian, Exxon posted a U.S. upstream loss of $183 million.

Neither Chevron nor Exxon has voiced concerns about “peak oil demand,” which some analysts and market watchers feel could be coming as soon as 2040. But that hasn’t stopped other internationals from pivoting towards a future of low price and low demand.

Royal Dutch/Shell beat expectations with a strong earnings report, posting a $3.6 billion profit in Q2 of 2017, tripling its earnings from a year ago. Shell managed its improvement through cutting costs in the face of low prices, which the CEO believes might improve in the short term. He’s stated that Shell will be “resilient to oil prices,” and will follow improved efficiency with a more diverse portfolio.

Upstream profits were $339 million, a major improvement from Q2 of 2016 when Shell posted a $1.3 billion loss. Production nevertheless declined from 3.752 million boe/d to 3.495 million boe/d, a trend which will continue as Shell sheds assets in Malaysia and Australia. The company’s debt-to-assets ratio improved, though last year was marked by Shell’s massive acquisition of BG Group for $54 billion.

Anticipating “lower for longer” oil prices, Shell has positioned itself as the most forward-looking major company. It’s CEO says he intends to purchase an electric car, Shell followed the BG Group purchase with statements that the future would be in cleaner fuels like natural gas, rather than conventional oil, and unlike the US majors Shell sees peak oil demand coming as soon as the 2030s, according to its CEO. Related: Goldman: $50 Oil More Profitable Than $100 Oil

Shell plans on spending $1 billion on its New Energies division to prepare for the transition toward renewable power and electric cars. It’s very likely that Shell will follow its current round of divestments by shedding even more assets, pulling itself away from traditional upstream activities and diversifying to meet changing future demand and persistent low prices.

Looking at these three majors, it’s clear that big oil is taking the changing market conditions into account as they pivot away from expensive long-term projects that depend on high prices. Shell, along with BP and Total, are also looking to increase their diversification, though Chevron and Exxon may count on projects on the US patch and in the Gulf of Mexico keeping them in the black.

In the event that prices stay in the $50s, each major may find new ways to stay profitable, adding credence to a recent report from Goldman Sachs that oil in the $50s may be more profitable than oil in the $100s, at least for the biggest firms.

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